The Canadian Cannabis Industry

Louis O'Neill8 Oct 5min read

As Canada prepares for the arrival of legalisation 2.0, we look back at the country's first year of legalised cannabis.

We note that the subject contained in this article represents illegal activity in certain jurisdictions. Whilst we do not condone any acts which are contrary to any such laws, we understand that readers in those jurisdictions which have decriminalised cannabis may find this article of interest.

In many ways, Canada became a torchbearer for the cannabis community when it legalised the plant for recreational purposes on October 17th last year. This made Canada the second country, after Uruguay, to do so.

And even before that, Canada had been ahead of the curve when it comes to marijuana, when the country gained an impressive first-mover advantage in the global cannabis market after it legalized medicinal marijuana in 2001.

This early foray into the cannabis arena gave it a significant headstart over many other countries and made Canada the perfect breeding ground for some of the largest cannabis companies in the world. Massive players like Aurora and Canopy Growth — who both dominate the global game — were both born out of Canada.

Though according to many industry experts, last year's rollout of recreational cannabis legalisation in The Great White North left a lot to be desired. Regulatory issues meant that companies had to wait for months to have their licenses approved, leaving a severe lack of brick and mortar stores.

Unfortunately, this led to a slew of other issues, including high prices, lines that were hours long, and a lack of available product.

This concatenation of problems obviously didn't do the industry any favours. As a result, Statistics Canada estimated that 79% of marijuana was still being purchased on Canada's black market as recently as May this year.

There have been a lot of issues with Canada's cannabis industry, but could there be a light at the end of the tunnel?

Tortoise and the Hare

We've all heard of the age-old tale of the Tortoise and the Hare. And it looks like Canada may just turn out to be a tortoise.

For example, in the first full month that cannabis was legal in Canada, store sales totalled $54 million and plateaued around that same amount for four months. To many, $54 million a month is certainly a lot of money. However, it wasn't nearly what many had expected.

Sales and revenues have been absolutely horrible post-legalization.

Jason Zandberg, a special situations analyst at PI Financial

In fact, sales were performing so poorly that BDS Analytics had to lower their prediction for the future market value of Canadian cannabis. It truly seemed like the country had fumbled a golden opportunity.

However, while Canada has certainly have made some mistakes, it may also have learned from them – as it looks like the country is finally starting to find its feet. Just last July, recreational sales reached their highest point, at $104 million.

As you can see, things started very slowly in Canada, and are only just beginning to kick into gear. Ontario alone is set to get 50 new stores in the coming months, and BDS Analytics now predicts there will be an oversupply of cannabis by the end of the year.

Nick Pateras, vice-president of strategy for Lift & Co. spoke recently at the Canadian Cannabis Summit in Calgary and talked about the upcoming oversupply.

"We're going to have a dramatic oversupply in two to three years."

"One million kilograms of cannabis is what the market needs right now and if every licensed producer (LP) executes on their business plan, you could have three million kilograms," Pateras said.

The country has already experienced an oversupply in Oregon, where supply has effectively doubled demand, leading to a 65 percent decrease in the wholesale price of cannabis from 2017 to 2018, according to Pateras.

More stores and more pot means more competition, which will subsequently result in more competitive pricing. This shift toward lower pricing and increased supply is crucial if the country wants to eliminate its thriving black market. For the moment, it seems that Canada's legal pot sales are just the tip of the iceberg.

Canada clearly has an existing market of cannabis consumers that have yet to be satiated by the existing industry, and if prices start to drastically drop, there's a good chance they'll start spending their money on the legal market. Statistics Canada reports in their National Cannabis Survey that quality and safety—as well as pricing—are the number 1 and 2 factors people look at when choosing their cannabis.

If the legal market continues to shape up, consumers will soon have access to higher regulated, higher quality product, ideally at an equal or lower price than black market. On top of this, there's legalization 2.0 coming just around the corner…

Legalisation 2.0

While Canadian companies try to lure black market consumers into the legal market, there's another emergent demographic they may acquire in the coming months, thanks to legalisation 2.0.

Known as the second wave of legalisation and occurring exactly one year after the first legalisation of cannabis in Canada, legalization 2.0 will allow for the consumption of additional cannabis form factors for those over the age of 21, including edibles, extracts, and concentrates.

Increasing the options on the marijuana menu in Canada may help to further pry open the Canadian market, as many argued that country's initial restrictions on these products contributed to its lacklustre performance post-legalisation. This is especially true if you look at states in the U.S. that have legalised cannabis—such as Colorado, California and Washington—where edibles and extracts now constitute almost 60% of the market. Clearly, there's a demand for smoke-free alternatives.

And this is something Deloitte has also confirmed, after its 'Nurturing New Growth' report observed that there is a currently untapped demographic of cannabis consumers who are more conservative, a little older, and more family-oriented than the existing consumer market.

These are consumers that are less likely to be risk-takers, and who are also less likely to consume flower. For this reason, they haven't been lured to the existing legal market or the black market.

These 'likely' consumers—as the report calls them—are most interested in trying edibles, topicals, and beverages once they are made legal. If Canada's rollout of legalization 2.0 is better than the first, we may see a whole new wave of cannabis consumers.

Source: Deloitte

The only cloud looming over legalisation 2.0 (and it's a big one) is the current vaping crisis.

Currently, 46 US states, over 850 reported cases and at least 12 deaths have been reported as a result of vaporizers purchased almost entirely off the black market.

While we argue that this serves as a perfect argument for legalisation, hysteria is beginning to set in, and many U.S. states are considering taking the opposite tact – increasing regulations on vaporizer products to prevent their use.

Canada will no doubt be hit by the current stigma surrounding cannabis vapes, which also means that the country's second wave of legalization may, once again, be slow to launch.

Vaporizers were looking poised to be the form factor of choice for cannabis consumers, as they continued to absorb more and more market share each quarter. Now, it's looking questionable if they will be anyone's form factor of choice, at least until the cause of the vaping illnesses is confirmed.

Prior to the vaping crisis, BDS Analytics saw the Canadian Cannabis market reaching $5.2 billion by 2024. For now, only time will tell if this number rings true, and whether or not the vaping crisis will play a role.

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